Advanced Search
MyIDEAS: Login to save this paper or follow this series

Asymmetric Information and Overinvestment in Quality

Contents:

Author Info

  • Paul Belleflamme
  • Martin Peitz

Abstract

In a standard adverse selection world, asymmetric information about product quality leads to quality deterioration in the market. Suppose that a higher investment level makes the realization of high quality more likely. Then, if consumers observe the investment (but not the realization of product quality) before purchase, they can infer the probability distribution of high and low quality that may be put on the market. We uncover two effects that may lead the firm to overinvest in quality compared to a market with full information: first, an adverse selection effect according to which a sufficiently large investment can avoid adverse selection and, second, an efficiency effect according to which a larger investment reduces the probability of socially inefficient, low quality products in the market.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-04/cesifo1_wp2619.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2619.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:ces:ceswps:_2619

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: asymmetric information; product quality;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 24(3), pages 461-83, December.
  2. Steven Tadelis, 1999. "What's in a Name? Reputation as a Tradeable Asset," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 548-563, June.
  3. Luis M.B. Cabral, 2000. "Stretching Firm and Brand Reputation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 658-673, Winter.
  4. Levin, Jonathan, 2001. "Information and the Market for Lemons," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 657-66, Winter.
  5. Paul R. Milgrom & John Roberts, 1984. "Price and Advertising Signals of Product Quality," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 709, Cowles Foundation for Research in Economics, Yale University.
  6. Kessler, Anke S, 2001. "Revisiting the Lemons Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 25-41, February.
  7. Meurer, Michael & Stahl, Dale II, 1994. "Informative advertising and product match," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 12(1), pages 1-19, March.
  8. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1187-1206, December.
  9. Lensink, Robert & Sterken, Elmer, 1999. "Asymmetric information, option to wait to invest and the optimal level of investment," CCSO Working Papers, University of Groningen, CCSO Centre for Economic Research 199917, University of Groningen, CCSO Centre for Economic Research.
  10. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
  11. Shiou Shieh, 1993. "Incentives for Cost-Reducing Investment in a Signalling Model of Product Quality," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 466-477, Autumn.
  12. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers, Michigan - Center for Research on Economic & Social Theory 89-23, Michigan - Center for Research on Economic & Social Theory.
  13. Andrew F. Daughety & Jennifer F. Reinganum, 2007. "Communicating Quality: A Unified Model of Disclosure and Signaling," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0703, Vanderbilt University Department of Economics.
  14. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Secrecy and Safety," Vanderbilt University Department of Economics Working Papers, Vanderbilt University Department of Economics 0317, Vanderbilt University Department of Economics, revised Sep 2003.
  15. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 281-92, May.
  16. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
  17. Leland, Hayne E, 1979. "Quacks, Lemons, and Licensing: A Theory of Minimum Quality Standards," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1328-46, December.
  18. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 87(3), pages 355-74, August.
  19. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 615-41, August.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2619. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.